1. Assume Joseph spends his entire income on X and Y, and his indifference curve
ID: 1206912 • Letter: 1
Question
1. Assume Joseph spends his entire income on X and Y, and his indifference curves have the usual convex shape. If Joseph maximizes his utility, then
a. he spends his entire available income.
b. there are other bundles that are preferred at the current price ratio
c. the slope of his indifference curve is greater than the slope of his budget line
d. the slope of his indifference curve is smaller than the slope of his budget line
2. the long-run price elasticity of demand for a product is generally___the short-run elasticity for the same product.
a. lower than
b. equal to
c. higher than
d. not comparable to
3. assume the demand function for skin care products is given by Q = 1,000-20P+5i. if P=$25 and i=$1,000 currently, then:
a. skin care products are a normal good
b. the elasticity of demand is equal to 11
c. skin care products are interior
d. the price is too high
Explanation / Answer
1.) a. he spends his entire available income. because by spending his entire income joseph will be on its highest indifference curve , If Joseph maximizes his utility, then he has spent all his entire available income to maintain this highest utility level.
2.) because Demand and supply are more elastic in the long run then it can be concluded that the long-run price elasticity of demand for a product is generally higher than the short-run elasticity for the same product.
3.) given i=$1,000, if we increase the price of the skin care product its demand decreases. alternatively, to sell more and more quantities of skin care products , given i=$1,000 currently, producers have to decline their prices. thus this shows that skin care products are a normal good.
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